The Economics of a Small VC Fund

Two years ago I started a fund. For the fund to be viable, it had to be at least $5 million, but somewhere in the neighborhood of $8-10 million would have been perfect. Thankfully, that's what I raised--$8.3 million.

So how does it work? How does one make money raising a venture fund of this size? Not easily, let me tell you. The benefit comes in the upside, and it's very back end weighted. If you're looking to make a lot of dough in the short term, microVC isn't for you.

Here's how it plays out:

I have a 2.5% management fee. Most larger funds have a fee around 2%, but when you're this small, you need a little bit extra to keep the lights on. It's only a little bit of a performance drag, though, because management fees act like a loan. You charge your limited partners this, but you have to pay it back before you start taking a cut of the profits. It's more "borrow" pay than "take home" pay. If the fund is a disaster, you don't have to give it back, but I plan on being successful, so I still think of it like a loan.

That means I have a total budget of a little over $200,000 to run the entire operations of Brooklyn Bridge Ventures. Over time, when I raise the second and third fund, those fees will ramp down in the out years, but I'll still have two funds worth of management fees to run with. That's a big help. You're running pretty lean when you're on your first fund.

I take a salary of $100,000, while healthcare and other HR related expenses like add up to another $16k on top of that. You can look at this two ways. On one hand, this is probably less than your average associate makes. Now that I think of it, it is, in fact, less than what I made as an associate. I hear that partners can make $300,000 on up to a million dollars at a big fund, and that's before their cut of the upside.

It's also probably less than most funded CEOs are making--or certainly less than your average software developer.

Meh. If I was optimizing for cash, I would have been an investment banker a long time ago.

I don't have any kids. I live in the hinterlands of Bay Ridge, Brooklyn, and so my overhead isn't that high. My nine year old car is paid for and I put more mileage on my bike anyway.

And, if you really want to put things in perspective, I'm pretty sure this is more than my parents ever made combined. So, no complaints here.

By second highest expense is the administration of my fund to various types of professional services. My fund administrator, who I'm sure is doing me a favor because I've known them forever, is charging me around 20k. Tax prep is another 12k.

Legal is lumpy. The creation of the fund was charged to the assets of the fund itself, and outside of that, I really don't have a lot of legal work that needs to be done. I send out my own term sheets and review docs myself--especially since I'm in sydicated rounds. When a bigger fund is in a round with me, they're going to look at the legals, too--so I'm generally fine with whatever they go for. If I was the only one in, I couldn't do it that way. Plus, when I look at my risks--is the risk that a legal term will shoot me in the foot or that these two founders and a prototype run this business into the ground. My expected value of legal term haggling is near zero over the long term, so I'm not going to spend a lot of time and effort on it. Still, one should probably budget at least 10k annually just in case.

Ok, so now, very quickly, we're down to about 50k of budget after doing all the must-dos. I have a desk in a co-working space--that's $5k a year. I have a terrific part time assistant and she does a max of about $800 of work for me a month. I wouldn't be able to run my fund without her, so that's $10k well spent.

That leaves about $2500 a month all the other random stuff--website, Mailchimp, paying for breakfasts, bike flat tires, travel, conferences, etc.

And that's that.

The upside, on the other hand, is pretty amazing, in my mind.

Back of the napkin math on the upside.

The fund's dollars are used both for investments and for administration--so lets's say I wind up putting about 85% of the fund to work in actual investments. That's about $7 million. If all I do is double it, that's $14 million of returns. Subtract the $8.3 million of initial capital with all its fees and stuff, and you've got about $6 million of gains. That's a little over a million dollar gain for me personally. If you want to think about it simply, for every "x", or multiple of return, that's another approximately $1.4 million. A fund that returns three dollars for every dollar of capital invested would be a $2.4 million return for me. Four times return is $3.8 million, and so on and so on, and that's just one fund. At some point you're five or seven years down the line and your cut of the profits starts coming in more smoothly, because in any given year, your seven year old investments are getting sold, going public, etc. So, ten years from now, investments I make three years from now might be exiting. Some may take longer, some might exit in a shorter amount of time.

The most important thing, though, is that I have a chance of making a million dollars doing something I love. To me, that puts me in the 1% of the 1% of life. Can I buy a majority stake in the Mets? With these economics, doubtful, but you'll never see me complaining about money, or frankly, anything about my job. I feel very lucky to be doing this.